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The Influence of Demographics and Household Specific Price Indices on Consumption Based Inequality and Welfare: A Comparison of Spain and the United States

Thesia I. Garner, Javier Ruiz-Castillo, and Mercedes Sastre


Previous research suggests that income inequality is lower in Spain than in the U.S. This paper studies whether this ranking remains the same when household consumption expenditures are used as a proxy for household welfare. Both inequality and social welfare, as components of economic well-being, are examined. Total household expenditures from each country's 1990-91 consumer expenditure survey are used as the basis for the analysis. For tractability, equivalence scales depend only on the number of people in the household and not any other demographic characteristic. Household specific price indices are used to express the 1990-91 expenditure distributions at winter of 1981 and winter of 1991 prices. Decomposable measurement instruments are used both for the inequality and social welfare analyses. Bootstrap methods are used to produce confidence intervals for all estimates.

When consumption expenditures are substituted for income as the measure of economic well-being, the ranking of Spain and the U.S. varies as both household size and the equivalence scale adjustment change. When focusing on household size alone, inequality and welfare comparisons are drastically different for smaller and larger households. The income inequality ranking can only be maintained for expenditure distributions when economies of scale are assumed to be small or non-existent. However, welfare is always higher in the U.S. than in Spain. It is concluded that household demographic characteristics, as well as equivalence scale adjustments, can be very important in international comparisons. With regard to household-specific relative price effects, inflation during the 1980s in both countries has been essentially neutral from a distributional point of view, so that all results are robust to the choice of time period.